At the start of 2019, I compiled a list of predictions that so-called “gurus” had made for the upcoming year, along with some items I heard frequently from investors, for a consensus on the year’s “sure things.” It is now time for our third quarter review. As is my practice, I will give a score of +1 for a forecast that came true, a score of -1 for one that was wrong, and a 0 for one that was basically a tie.
Here is how we stand with respect to the eight sure things I am tracking:
- U.S. economic growth would continue strong, slowing just slightly from about 3% to 2.7%. The U.S. economy grew by an annualized 3.1% in the first quarter of 2019 and then slowed to a growth rate of 2.0% in the second quarter. The Philadelphia Federal Reserve Third Quarter 2019 Survey of Professional Forecasters, released on August 9, 2019, projects GNP growth of 1.8% in the third quarter and 2.0% in the fourth, producing a full year rate of 2.3%. With growth appearing to slow more than expected, we’ll score this -1.
- Corporate profit growth would continue to be strong, with Morgan Stanley predicted S&P 500 companies’ earnings would reach a cumulative $178 a share, an increase of about 8%. The latest (September 30) consensus analysts’ estimates for S&P 500 operating earnings per share have been lowered to about $164. Score: -1.
- The U.S. stock market would have a strong year. Bloomberg gathered 14 forecasts for 2019 from the firms it tracks, and the average prediction was for the S&P 500 Index to rise to 3,056 by year-end. Fueling the strong forecast was that, based on forecasted earnings, valuations had fallen to the cheapest levels since 2006 – the forward-looking price-to-earnings ratio is only about 15. Mike Wilson at Morgan Stanley was the least bullish, with a target at 2,750. The S&P 500 Index closed the third quarter at 2,977, and the SPDR® S&P 500 ETF (SPY) provided a total return of more than 20%. Score: +1.
- With slowing economic growth and tame inflation, it would be safe to extend maturities. Futures markets showed a 91% probability of no rate increases in 2019 by the Federal Reserve. Thus, longer-term bonds would outperform. In the first nine months, Vanguard’s Long-Term Treasury Index ETF (VGLT) returned close to 20%, far outperforming Schwab’s Intermediate-Term U.S. Treasury ETF (SCHR), which returned about 7%, and Schwab’s Short-Term U.S. Treasury ETF (SCHO), which returned about 3.0%. Score: +1.
- With the Federal Reserve lowering expectations for further rate increases (the market then expected only one rate increase in 2019) and the European Central Bank beginning to unwind its easy monetary policy (having ended its bond-buying program and expected to begin to raise interest rates in the second half of 2019), the dollar would weaken versus the euro. The U.S. Dollar Index (DXY) closed 2018 at 96.2 and ended the third quarter at 99.4. Score: -1.
- Concerns over “massive” budget deficits combined with the weaker outlook for the dollar would lead to gold putting in a strong performance. Gold closed 2018 at $1,282. It finished the first half at $1,478, an increase of about 15%. Score +1.
- With continued uncertainty over the risk of a trade war, the problem of Brexit, and the standoff between the European Central Bank and the Italian government over the Italian budget deficit (among other geopolitical problems), volatility would remain high. The VIX ended 2018 at 25.42 and finished the third quarter at just 16.24. Score: -1.
Our third quarter 2019 score comes to four winners and four losers, a net score of 0. I’ll report back at the end of the fourth quarter.
Here’s the historical evidence on my list of sure things:
|
Year
|
Number of Sure Things
|
Yes/True (+)
|
No/False (-)
|
Tie/Draw
|
Net Score
|
|
2018
|
7
|
5
|
1
|
1
|
+5
|
|
2017
|
8
|
2
|
6
|
0
|
-4
|
|
2016
|
8
|
2
|
6
|
0
|
-4
|
|
2015
|
8
|
3
|
4
|
1
|
-1
|
|
2014
|
10
|
3
|
7
|
0
|
-4
|
|
2013
|
7
|
2
|
5
|
0
|
-3
|
|
2012
|
8
|
3
|
4
|
1
|
-1
|
|
2011
|
8
|
1
|
7
|
0
|
-6
|
|
2010
|
5
|
1
|
4
|
0
|
-3
|
|
Total (%)
|
69
|
22 (32%)
|
44 (64%)
|
3 (4%)
|
-21
|
Apparently, sure things are not so sure.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.
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